Stock Market– Iconic Symbol of Capitalism– Rigged, Fixed, Scam… Its Become a Wild West Of Dueling Algorithms…

Is the stock market rigged? This is a question you might expect from a wild-eyed conspiracy theorist or a down-and-out day trader… but according to Thomas Peterffy; the current state of the stock market is ‘complete mess’… stock market has become a– Wild West of dueling algorithms. Stock exchanges used to be physical place, where people would come together to buy or sell, hoping to achieve the best price for themselves…

The more the exchange was able to attract all of the buy and sell interests in a product, the more the prices on exchange would reflect the true state of supply and demand… It was the old mantra: liquidity breeds liquidity, but things have changed… Now exchanges are all run by computers, electronic communications, electronic exchanges, dark pools, flash orders, multiple exchanges, alternative trading venues, direct access brokers, OTC derivatives, high-frequency traders… and many stock market experts don’t really understand the inner workings of the system…

stock imagesK67KBCOQ

Increasingly, the financial markets are becoming more like a casino, except that a casino is more transparent and simpler to understand. Technology is both– hero and villain in stock trading and brokerage: For the good– its brings electronic trading and record-keeping for more transparency and accountability, and the trading processes are more efficient, lowered transaction costs, more liquidity… However, for the bad– its brings more fragmentation, and the opportunity for people to use technology to keep to the letter, but avoid the spirit of the rules– and thus creating the current mistrust…

According to Thomas Peterffy; it’s vital that we bring back– order, fair dealing, trust in the marketplace. The financial markets of the world are at a turning point: Technology, market structure, and new products have evolved more quickly than the capacity to understand or control them. The result has been a series of crises over the past few years that have caused many investors to lose confidence and to think that whole system is a rigged game…

In the article Is the Stock Market Rigged? by Bill Mann writes: Self-interest does a strange thing to people: It corrupts. So this leads to two questions: Is the market rigged? Does this hurt you? As to the first, my answer is an unequivocal ‘yes’, followed by ‘and this isn’t new’; high-frequency trading (HFT) as practiced by exchanges’, i.e.; selling of asymmetric access to select market participants, simply isn’t fair. The HFT algorithms essentially attempt to influence the price of the market through tactics like ‘quote stuffing’, which is about like it sounds.

Then that  questions becomes: How far are the manipulators willing to go to distort the market to their advantage… The second question is more important: When there are systematic activities, events… that cause the general investor to lose faith and perception that the markets are probably being manipulated, then that’s bad… However, there are lots of things that manipulate stock markets, for example; Federal Reserve policy is all about influencing investor behavior, so is capital-gains tax policy… so, where is the line?

Focusing on HFT as a reason to be in or out of the market is absurd. The stock market isn’t Las Vegas or some crooked numbers game. It’s a tool that allows ordinary folks to buy pieces of businesses, which, if you’re doing it right, tend to appreciate in value. Some lose, yes; but ultimately your investment returns are going to be driven by the quality of the investments you hold… Worrying about HFT as an individual investor is like worrying about sunspots…

Frankly, out-of-control management compensation is a–  far bigger drag on your long-term investment returns than HFT could ever dream of being… Returns in investing come from buying something, say for– $1 and selling it for a lot more… but, if it so happens that HFT causes you to buy it for $1.00000001 is that really harmful when you sell it for a good gain? Trading has many other more serious expenses– overt and hidden– and those expenses are far more troubling…

stock thRE33SY5G

A free market is not a free-for-all; it’s not a dog-eat-dog jungle where everyone is trying to rip off or to screw everyone else… According to Stuart Schneiderman; market participants are morally obligated to maintain market fairness. If they reduce it to lowest common moral denominator– their personal greed– then the markets will fail… It’s not easy to describe high-frequency trading; in truth, next to no one understands it. That’s why its adepts have been getting away with it, and screwing not only the individual investor but many institutional clients…

Michael Lewis makes an excellent effort to describe how the system works: Broadly speaking, there are three activities that led to a vast amount of grotesquely unfair trading: The first is called ‘electronic front-running’– seeing an investor trying to do something in one place and racing ahead of him to the next… The second is called ‘rebate arbitrage’– the seizing of whatever legal kickbacks, called rebates within the industry, that the exchange offered without actually providing the liquidity that the rebate was presumably meant to entice… The third, and probably by far the most widespread, is called ‘slow-market arbitrage’–

This occurred when a high-frequency trader sees the price of a stock change on one exchange and picks-off orders sitting on other exchanges before those exchanges were able to react; it happens all day, every day, and very likely generated more billions of dollars a year than all the other strategies combined.

In the article Is the Stock Market Rigged? by Ian Wyatt writes: Mary Jo White, head of Securities and Exchange Commission (SEC), was on Capitol Hill to testify about  manipulations in the stock market, and she says; the markets are not rigged… U.S. markets are the strongest and most reliable in the world… the U.S. financial markets are the best in the world…  and its long-term record proves that the stock market is the best place to build wealth…

However, given size , complexity of U.S. markets, it’s a ripe opportunity for manipulators and scammers to fool the system, recent frauds include; insider trading at hedge funds, credit default swaps, mortgage fraud, money laundering by big banks, and list goes on… The SEC has a specific mandate: Its mission is to protect investors, and maintain fair, orderly, and efficient markets, and facilitate capital formation… Despite defending the current structure of the markets, Ms. White did admit that the market is not perfect. But, she continued to defend the markets, saying; I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market…

In the article Markets are Rigged, So What? by Chris Mayer writes: I hear more and more people say the market is rigged… They say it is a game for insiders to fleece gullible outsiders, and Wall Street has not helped this image at all. There seems to be no end to lurid scandals or crises of confidence in the system… I have to say I, too, have felt this way more often of late. However, I believe there are ways to invest safely and feel good about it. You can ignore scandals. You can ignore Wall Street…

Just focus on investing in stocks of quality companies, and by paying attention to what I call the CODE System:

Cheap– these are stocks trading below replacement costs or below private market value…

Owner-operators– these are stocks with high insider ownership of the people in charge and/or a good track record of delivering results for shareholders…

Disclosures– these are stock for a business we understand, and it reports are transparent with good disclosures. Transparency is another word for the virtue we seek…

Excellent financial condition– these are stock from a business that is relative absence of liabilities, it has lots of cash and/or cash flow and the ability to ‘do deals’ (i.e., borrow at super-rates, take advantage of good business opportunities, convert assets to other uses, etc.)…

stock thD1XBNZQP

So is the market rigged? According to David Merkel; it depends who you are. If you understand your limitations, do your due diligence, and control your emotions, then no, the markets are not rigged… If you naively presume that you can make money in the markets without adequate study, discipline, experience, etc., eventually the markets will seem rigged... According to Tim Hanson; just another game rigged against youdata collected in a recent study said that only 15% trust the stock market, while another study revealed that 40% of 18-to-30 year old believe they will never feel comfortable enough with stocks to invest in them…

I am not defending Wall Street, which is rightfully in tatters after more than a decade of scandals, bubbles, dishonesty… But, the question that you should not be asking when investing in stocks is: Do you trust Wall Street? or Do you trust stock market? But rather: Do you trust the specific companies that you are looking to invest? Are these companies doing the right thing for the employees, customers, and suppliers?

According to Laurence Siegel; it’s possible to imagine a kind of high-frequency trading that is completely harmless and in fact beneficial… Since high-frequency trading improves liquidity, there’s a case to be made that it improves pricing… Whether some or all of that benefit is lost due to the front-running and other nefarious activity is an open question…

But truthfully, for a small investor it does not matter… this is more of rich person’s worry than average investor’s concern… High-frequency traders don’t care about, for example; the 100 shares of Company ‘A’ you’re trying to buy, or even the 500 or 1,000 shares of Company ‘B’… there’s no real money in these trades. Distasteful? Yes: A reason to avoid the market? Hardly: The stock market is not a zero-sum game, or a winner-take-all poker tournament… Over time, as economies grow stock markets will rise, and everyone will profit

Focus on long-term goals and ignore market noise, and you can coexist with the predators; you quickly realize that whoever is responsible for actions that lead to claims that the market is rigged is simply part of the sounds you are brushing off… According to Robert Laura; as for the question of whether the stock market is really rigged, the answer is absolutely–

Yes! It’s rigged with risks and opportunities that investors take each and every day. The reality is HFC is not illegal (yet)… News like this can shake markets and when it does– investors, advisors… must be prepared to respond by investing their money in the places that they feel is most suitable for them… Ultimately, the markets can only stay rigged as long as investors allow it to take place…